Focus shifts back to the Fed

25 July, 2016

Markets during the past week have been characterized mostly by a continued rally to new record highs for equity markets, most notably in the US where earnings season has entered full swing. Stock indexes have been buoyed by largely better-than-expected earnings reports, albeit on relatively low expectations.

Also helping stocks to continue their climb recently have been the prevailing accommodative stances among major central banks, including those in the UK, Japan, and the Eurozone. Both the Bank of England (BoE) and the European Central Bank (ECB) opted to keep interest rates unchanged and refrain from introducing new stimulus measures in their policy statements within the past two weeks. At the same time, however, both central banks continued to express concerns over the fallout from June’s Brexit vote, and both are expected to implement more easing in coming months. Disappointing UK PMI data released on Friday could also help to accelerate the case for impending BoE easing.

As for Japan, a resurgence of support for Japanese Prime Minister Shinzo Abe’s economic stimulus objectives has been tempered somewhat by reports that the Bank of Japan may also opt for inaction during its meeting next week. Despite this, the trajectory of Japan’s monetary policy appears rather clear in light of Abe’s assurances of further stimulus.

While helping to boost equity markets, the general lean towards further monetary easing by these central banks has placed increasing pressure on their respective currencies in the past few weeks. The pound, euro, and yen have all been weighed down against their chief rival, the US dollar.

With respect to the dollar, focus will shift next week from Europe back to the US Federal Reserve and its tenuous monetary policy stance. With other major central banks on a path towards more easing, the Fed now stands alone in its policy-tightening objectives. These objectives have likely been reinforced recently as concerns over Brexit consequences have faded in the US and economic data releases have consistently shown a relatively optimistic picture of the US economy. The question remains, therefore, as to whether the Fed will be swayed by its global counterparts during next week’s FOMC meeting, or will it focus more on the positive markers of the US domestic economy.

The likelihood of an actual rate hike by the Fed next week is very low, as significantly more data will likely be needed to convince the ever-cautious Fed that raising interest rates would be appropriate. As always, markets will take their cues from the language of the policy statement, especially with respect to the potential timing of the next rate hike and how many hikes might be expected by FOMC members in the coming months.

More hawkish-leaning language that acknowledges improving economic indicators and suggests a possible September rate hike should likely lead to a continued surge for the US dollar, a further drop for gold, and a pullback in soaring equity markets. In contrast, if a dovish stance prevails that falls more in line with global trends, which could suggest a lower likelihood of a rate hike this year, gold could see a rebound, equities could climb to even higher record highs, and the dollar’s recent rally could quickly experience a sharp reversal.


Source link  
Gold surges to major $1250 resistance as uncertainty prevails

Gold surged Thursday on a breakout of its previous consolidation to hit and slightly exceed major technical resistance at $1250, a level not seen since early November...

Gold remains vulnerable amid hawkish Fed, strong dollar, equity highs

Gold has climbed sharply since the beginning of the year as the US dollar has pulled back from its late-2016 highs and the US Federal Reserve has exercised characteristic restraint in raising interest rates further after the last rate hike in December...

Gold well-supported on safe-haven flows, lagging dollar

Increasing political and economic uncertainties under the new Trump Administration, coupled with a sliding US dollar since the beginning of the year, have led to a sharp rise in gold prices for more than a month...


Gold pressured as dollar and equities remain supported

As the US dollar found some new life on Thursday and US equity markets hovered right around their new all-time highs, gold extended its recent pullback well below the $1200 handle. Since late December, the price of gold had been in a sharp relief rally from its 10-month lows around $1125 support...

Crude oil maintains bullish trend

Oil prices were initially weaker at the start of the new week, but they have now recovered to trade almost flat at the time of this writing. At the weekend, the OPEC and some producers outside of the group met to discuss the progress of their oil production deal...

Trump press conference fails to deter equity bulls

President-Elect Donald Trump spoke on Wednesday morning at his first formal press conference since the November elections, and the markets were all ears. Trump covered a lot of ground with multiple topics that included...


Gold ripe for potential relief rally

The charts tell a clear story of the unrelenting plunge in gold prices since early November. This steep dive has been the result of several related factors, all of which have the potential to extend well into the new year. These largely Trump-driven factors include...

Could EUR/USD finally break 1.05 on this FOMC day?

The market is demanding a rate rise and the Fed better deliver it today, for if it doesn’t the bank’s credibly will be severely damaged. There is really no excuse not to do so. Economic data has been improving, financial markets are calm...

Mixed Jobs Report Keeps High Fed Expectations Intact

As we noted the day before Friday’s US jobs report, only a significantly worse-than-expected reading for November would have likely made the Federal Reserve’s next interest rate decision more difficult...

  


Share: